<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-18836
MIDLAND RESOURCES, INC.
(Exact name of small business issuer as specified in its charter)
Texas 75-2286814
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
16701 Greenspoint Park Drive, Suite 200, Houston, Texas 77060
(Address of principal executive offices)
(713) 873-4828
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES X NO
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, $.001 par value: 4,401,031 shares outstanding at
September 30, 1996
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MIDLAND RESOURCES, INC.
Table of Contents
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
- ------------------------------
<S> <C>
Consolidated Balance Sheets as of September 30, 1996 (Unaudited)
and December 31, 1995 3
Unaudited Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1996 and September 30, 1995 5
Unaudited Consolidated Statements of Cash Flows for the three and nine
month periods ended September 30, 1996 and September 30, 1995 7
Note to Unaudited Financial Statements 9
Management's Discussion and Analysis of Financial Condition
and Results of Operation 10
PART II. OTHER INFORMATION
- ---------------------------
Notes Concerning Other Information 16
SIGNATURES 17
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</TABLE>
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PART I - FINANCIAL INFORMATION
MIDLAND RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash $ 88,962 $ 514,610
Accounts receivable:
Oil and gas sales 796,919 545,910
Related parties - 97,681
Other 185,681 178,804
Marketable equity securities 309,132 -
Property held for sale 255,073 255,073
Other current assets 78,917 106,865
Deferred tax assets 378,410 339,509
------------ ------------
Total current assets 2,093,094 2,038,452
------------ ------------
Property and equipment, at cost, partially pledged:
Oil and gas properties and equipment,
using successful efforts method 25,488,236 21,505,685
Transportation equipment 282,532 264,565
Computer equipment and software 229,155 214,809
Office furniture and equipment 97,026 90,465
Land, building and leasehold improvements 102,483 100,612
Less accumulated depreciation, depletion
and amortization (12,111,126) (11,816,754)
------------ ------------
Property and equipment, net 14,088,306 10,359,382
------------ ------------
Other assets:
Deferred tax asset 99,516 262,554
Goodwill, net of amortization 1,230,178 773,961
Contracts and leases, net of amortization 424,651 287,690
Note receivable 321,400 331,857
Other 37,909 69,456
------------ ------------
Total other assets 2,113,654 1,725,518
------------ ------------
Total assets $ 18,295,054 $ 14,123,352
============ ============
</TABLE>
The accompanying note is an integral part
of the financial statements.
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MIDLAND RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 125,667 $ 1,224,401
Accounts payable and accrued expenses:
Trade 1,047,217 726,302
Related parties - -
----------- -----------
Total current liabilities 1,172,884 1,950,703
Long-term debt 8,852,787 4,524,617
Minority interest in subsidiary 310,543 -
----------- -----------
Total liabilities 10,336,214 6,475,320
----------- -----------
Stockholders' equity:
Preferred stock, par value $0.01 per share; 20,000,000
shares authorized; none issued - -
Common stock, par value $0.001 per share;
80,000,000 shares authorized; 4,393,531 and
4,397,031 shares issued at December 31, 1995
and September 30, 1996, respectively 4,401 4,394
Additional paid in capital 7,898,199 7,859,794
Treasury stock, at cost, 7,300 shares at
December 31, 1995 - (15,053)
Note receivable from officer/director - (453,641)
Retained earnings 56,240 252,538
----------- -----------
Total stockholders' equity 7,958,840 7,648,032
----------- -----------
Total liabilities and stockholders' equity $18,295,054 $14,123,352
=========== ===========
</TABLE>
The accompanying note is an integral part
of the financial statements.
Page 4
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MIDLAND RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------
1996 1995
----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating revenue:
Oil and gas sales $1,765,338 $1,249,724
Management fees 15,000 25,500
Property operator fees 21,128 22,504
Other 5,137 8,420
---------- ----------
Total operating revenue 1,806,603 1,306,148
---------- ----------
Operating costs and expenses:
Oil and gas production 780,814 563,983
Exploration costs 157,801 -
Dry hole and abandonment costs 203,983 1,031
Depreciation, depletion and amortization 272,863 310,639
General and administrative 391,422 222,525
Other 29,373 -
---------- ----------
Total operating costs and expenses 1,836,256 1,098,178
---------- ----------
(29,653) 207,970
Other income and (expenses):
Gain (loss) on sale of assets 4,497 (103,041)
Interest and other income 20,798 2,144
Interest expense (184,318) (158,406)
---------- ----------
Total other income and expenses (159,023) (259,303)
---------- ----------
Loss before income taxes (188,676) (51,333)
Deferred federal income tax benefit (64,149) (20,655)
---------- ----------
Net loss $ (124,527) $ (30,678)
========== ==========
Net loss per common share $ (0.028) $ (0.009)
========== ==========
Average shares outstanding 4,401,031 3,370,398
========== ==========
</TABLE>
The accompanying note is an integral part
of the financial statements.
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MIDLAND RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating revenue:
Oil and gas sales $4,870,664 $3,854,971
Management fees 45,000 76,500
Property operator fees 64,717 62,320
Other 7,767 36,289
---------- ----------
Total operating revenue 4,988,148 4,030,080
---------- ----------
Operating costs and expenses:
Oil and gas production 2,203,103 1,867,544
Exploration costs 467,630 -
Dry hole and abandonment costs 412,932 5,497
Depreciation, depletion and amortization 746,024 906,714
General and administrative 1,018,250 805,631
Other 29,373 -
---------- ----------
Total operating costs and expenses 4,877,312 3,585,386
---------- ----------
110,836 444,694
Other income and (expenses):
Gain (loss) on sale of assets 35,174 (103,244)
Interest and other income 53,472 11,533
Interest expense (496,900) (451,878)
---------- ----------
Total other income and expenses (408,254) (543,589)
---------- ----------
Loss before income taxes (297,418) (98,895)
Deferred federal income tax benefit (101,120) (33,624)
---------- ----------
Net loss $ (196,298) $ (65,271)
========== ==========
Net loss per common share $ (0.045) $ (0.019)
========== ==========
Average shares outstanding 4,394,234 3,366,571
========== ==========
</TABLE>
The accompanying note is an integral part
of the financial statements.
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MIDLAND RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------------
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (124,527) $ (30,678)
Deferred federal income tax benefit (64,149) (20,655)
Depreciation, depletion and amortization 272,863 310,639
Gain (loss) on sale of assets (4,497) 103,041
Increase in accrued oil and gas sales (84,688) (61,997)
(Increase) decrease in receivable from related parties 19,344 (48,420)
Increase in due to related parties 9,049 7,666
Increase (decrease) in accounts payable relating
to operations (44,649) 625,439
Decrease in other current assets 58,581 1,723
Decrease in note receivable 3,562 2,030
Other 127,481 (98,717)
----------- ----------
Net cash provided by operating activities 168,370 790,071
----------- ----------
Cash flows from investing activities:
Proceeds from sale of marketable equity securities 26,239 -
Proceeds from sale of property and equipment 3,736 -
Additions to property and equipment (699,439) (768,765)
Investment in marketable equity securities - -
Building selling expenses, net of cash received - (25,515)
Purchase of Summit Petroleum Corporation (1,653,049) -
----------- ----------
Net cash used in investing activities (2,322,513) (794,280)
----------- ----------
Cash flows from financing activities:
Exercise of warrants and options 20,909 16,763
Long-term borrowing 1,730,000 850,000
Principal payments on long-term debt (6,183) (723,752)
Collection of note receivable from officer/director 453,641 -
----------- ----------
Net cash provided by financing activities 2,198,367 143,011
----------- ----------
Net increase in cash 44,224 138,802
Cash, beginning of period 44,738 47,857
----------- ----------
Cash, end of period $ 88,962 $ 186,659
=========== ==========
</TABLE>
The accompanying note is an integral part
of the financial statements.
Page 7
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MIDLAND RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (196,298) $ (65,271)
Deferred federal income tax benefit (101,120) (33,624)
Depreciation, depletion and amortization 746,024 906,714
Gain (loss) on sale of assets (35,174) 103,244
(Increase) decrease in accrued oil and gas sales (179,874) 19,829
(Increase) decrease in receivable from related parties 52,704 (50,689)
Increase in due to related parties 19,683 16,937
Increase in accounts payable relating
to operations 232,131 693,574
(Increase) decrease in other current assets 36,206 (57,648)
Decrease in note receivable 10,457 2,030
Other 89,302 (113,246)
----------- -----------
Net cash provided by operating activities 674,041 1,421,850
----------- -----------
Cash flows from investing activities:
Proceeds from sale of marketable equity securities 36,086 -
Proceeds from sale of property and equipment 37,736 9,250
Additions to property and equipment (2,518,158) (1,418,850)
Investment in marketable equity securities (344,866) -
Building selling expenses, net of cash received - (25,515)
Purchase of Summit Petroleum Corporation (1,653,049) -
----------- -----------
Net cash used in investing activities (4,442,251) (1,435,115)
----------- -----------
Cash flows from financing activities:
Exercise of warrants and options 38,412 16,763
Short-term borrowing from bank 70,000 -
Long-term borrowing 3,550,000 1,407,000
Principal payments on short-term debt (70,000) -
Principal payments on long-term debt (699,491) (1,550,794)
Collection of note receivable from officer/director 453,641 -
----------- -----------
Net cash provided by (used in) financing activities 3,342,562 (127,031)
----------- -----------
Net decrease in cash (425,648) (140,296)
Cash, beginning of period 514,610 326,955
----------- -----------
Cash, end of period $ 88,962 $ 186,659
=========== ===========
</TABLE>
The accompanying note is an integral part
of the financial statements.
Page 8
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MIDLAND RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
Note A. Organization and Significant Accounting Policies
Organization and Basis of Presentation
In July 1990, Midland Resources, Inc. (the "Company") acquired the
interests of the seven Morgan Energy Oil and Gas Income Programs
("Partnerships") pursuant to the Partnerships' Consolidated Plan of
Reorganization. This transaction was accounted for under a method similar to
the pooling of interest method.
On December 31, 1993, the Company acquired Midland Resources Operating
Company, Inc. ("MRO") (formerly Miresco, Inc.). On September 18, 1996, the
Company acquired approximately 81.5% of the outstanding stock of Summit
Petroleum Corporation ("Summit"). The consolidated financial statements
include the accounts of the Company, MRO and Summit. The minority interest
ownership of Summit is properly included in the consolidated financial
statements. Upon consolidation, all intercompany accounts, transactions and
profits are eliminated.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company and its subsidiaries as of September 30,
1996, the results of operations for the three and nine month periods ended
September 30, 1996 and 1995 and cash flows for the three and nine month periods
ended September 30, 1996 and 1995. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for a
full year. The accounting policies followed by the Company are set forth in
more detail in Note A of the "Notes to Financial Statements" in the Company's
annual report on Form 10-KSB filed with the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-QSB pursuant to the rules and
regulations of the Securities and Exchange Commission. However, the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Form 10-KSB.
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MIDLAND RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Capital Resources and Liquidity.
Midland Resources, Inc. (the "Company"), a Texas corporation, is an
independent oil and gas company engaged primarily in the acquisition,
operation, production, exploration and development of domestic oil and natural
gas. The Company's initial capitalization was through the acquisition of the
interests of seven public oil and gas income limited partnerships in exchange
for common stock and warrants of the Company. There were 2,264,522 shares of
common stock issued and, for each share of common stock issued, two warrants
were issued entitling the holder to purchase one share of common stock at $2.50
and one share at $4.00 during the period November 1990 to November 2002. The
warrants were redeemable by the Company, at its option, if the average market
price (as determined in the warrant agreement) of common stock exceeds the
warrant exercise price by 50 percent for a period of 90 consecutive calendar
days. On October 6, 1995, this requirement was met for the $2.50 warrant and
the Company called the $2.50 warrants. In June, 1996, the Company waived its
right to call the $4.00 warrants under the warrant agreement. As of September
30, 1996, none of the $4.00 warrants had been exercised.
On December 31, 1993, the Company acquired all of the issued and
outstanding common stock of Midland Resources Operating Company, Inc. ("MRO"),
an affiliated Texas corporation, through an agreement of acquisition under which
the Company issued 1,110,000 shares of common stock to Deas H. Warley III and
Sal J. Pagano, the former shareholders of MRO. The acquisition of MRO created
the opportunity for the Company to expand its revenue base through property
operations.
On September 18, 1996, the Company acquired approximately 81.5% of
the outstanding shares of Summit Petroleum Corporation ("Summit"), an
affiliated Colorado corporation, for $0.70 per share in cash. The Company
intends to acquire the other outstanding shares of Summit before December 31,
1996. The Company's present credit facility is expected to provide the funds
needed to complete this acquisition. Summit has been a participant with the
Company in several major projects, including the three dimensional ("3D")
seismic exploration projects in West Texas and the Texas Gulf Coast. The
acquisition of Summit will increase the Company's ownership position in those
key projects and expand its operations to the DJ Basin of Colorado.
The Company emphasizes the application of advanced technology to
explore for, develop and produce natural gas and oil. The Company's historical
growth has been primarily through the acquisition and subsequent development of
oil and gas properties. In 1995, the Company added 3D seismic exploration
activities. In early 1995, the Company began a joint project with the federal
government's Los Alamos National Laboratory to develop a computerized 3D
reservoir simulation model of the Cope Waterflood Unit operated by the Company.
The simulation model, currently under active development, will be utilized to
improve reservoir management and enhance oil production by locating bypassed
oil, determining new infill drilling locations and designing optimum waterflood
injection patterns for increased oil recovery. Management believes the Company
is one of the few its size to possess this capability.
The Company acquired a 100 percent working interest with an 87.5
percent net revenue interest in certain oil and gas properties in Ward County,
Texas (the Ned Wilson 133 property) from Conoco, Inc. on October 15, 1993
effective September 1, 1993. The purchase price of $925,000 was adjusted for
revenues and expenses from September 1, 1993 through the closing date of
October 15, 1993. Effective January 1, 1994, the Company sold a 10 percent
working interest in the Conoco acquisition discussed above to Summit for
$85,696 which was 10 percent of $856,960, the Company's cost adjusted for
revenues and expenses through December 31, 1993. The successful drilling of
three additional Cherry Canyon wells during the
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fourth quarter of 1995 at a cost to the Company of approximately $924,000,
brings the total number of wells operated by the Company in this field to ten.
The three new wells were completed with combined initial producing rates of 255
barrels of oil per day ("BOPD") and 540 thousand cubic feet of gas per day
("MCFD"). The Company expects combined average production rates of
approximately 100 BOPD and 265 MCFD, subject to normal declines.
The Company operated Jameson (Strawn) Field is located in the
southwest end of the Jameson feature in Coke and Sterling Counties
approximately 80 miles east of Midland, Texas. At the time the Company
acquired the Jameson properties, there were 21 gross wells which were shut-in
for various reasons by the former operator. Over a three year period the
Company has returned 15 of these wells to production and converted nearly 40
percent of the 54 currently producing wells to a less expensive plunger lift
method of artificial lift. The Jameson properties also provide opportunities
for reentries, infill drilling, and field extension development drilling. In
April and August, 1996 the Company completed two field extension development
wells at an aggregate cost of approximately $720,000. Average aggregate
production rates for these wells are approximately 45 BOPD and 250 MCFD,
subject to normal declines. Effective June 1, 1996, the Company acquired
various additional royalty interests from John Gordon McGill in properties in
the Jameson Field for approximately $500,000.
In May, 1995, the Company acquired a 50 percent working interest and
operations in three state tracts in Redfish Bay Field, Nueces County, Texas.
At the time of the acquisition there was marginal production from these tracts.
Under the acquisition agreement, the Company is required to expend certain
funds in the development of these tracts. The Company's performance is secured
by an $850,000 letter of credit issued by its bank in favor of the seller. The
Company began a rework program immediately and established a gas well at a cost
to the Company of approximately $41,000, which produced at initial rates of
1,550 MCFD of gas and 16 barrels of condensate per day. After six months of
production, the zone was depleted, and, in the first quarter of 1996, the
Company recompleted this wellbore to another zone at a cost to the Company of
approximately $53,000 with initial rates of 240 BOPD and 100 MCFD and expected
average production rates of approximately 160 BOPD and 40 MCFD, subject to
normal declines. Remaining development obligations under this agreement were
approximately $295,000 as of September 30, 1996. The Company's present credit
facility is expected to provide the funds needed.
In December, 1995, a replacement well was drilled in the Company owned
and operated Ackerly (Dean) Field in Dawson County, Texas (the T.L. Wallace
property), at a cost to the Company of approximately $402,000. This new well,
which was upstructure from an advancing adjacent waterflood operated by a major
oil company, had initial producing rates of 152 BOPD and 106 MCFD, subject to
normal declines.
In 1995, the Company acquired three 3D seismic exploration projects in
the Permian Basin Northwestern Shelf located in Terry and Hockley Counties,
Texas. The Company has a 50 percent working interest in two of the projects
and a 25 percent working interest in the other. Summit participates with the
Company for a 5 percent working interest in all three projects and MRO operates
the projects. In May, 1996, a test well was drilled on the Sunburst project.
The well encountered hydrocarbons in the Clearfork reservoir, but drill stem
tests, logs and seismic data indicated the zone to be too far removed from the
Clearfork structure to support a commercial completion attempt. The Abo zone,
which was the primary target in the well, was water-bearing, and the well was
plugged and abandoned. The cost to the Company as of September 30, 1996 for
all three projects was approximately $1,136,000, of which $890,000 was incurred
for seismic and leasehold acquisition costs and $234,000 was incurred to drill
the well. It is estimated that the Company will spend approximately $750,000
during the next six months in drilling exploratory wells on the three projects.
The Company's present credit facility and cash flow from operations are
expected to provide the funds needed.
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Effective May 1, 1996, the company acquired an additional 5.75 percent
working interest from Headington Minerals, Inc. in the Company operated Cope
Unit in Sterling County, Texas for approximately $79,000, and now owns
approximately 77 percent of the working interest in this property. The Cope
Unit produces from the Spraberry formation. In June, 1996, the Company drilled
a replacement well, No. 4-11, for one of the 15 producing wells in the unit
which was producing mostly water. Unit oil production was maintained at
approximately 135 barrels of oil per day and unit produced water was reduced
substantially. Cost to the Company was approximately $169,000.
Effective June 1, 1996, the Company acquired an additional 5 percent
working interest from Dobbs Oil & Gas, Inc. in the Company operated Copano Bay
property in Aransas County, Texas for approximately $177,000, and now owns
approximately 63 percent of the working interest in this property.
In July, 1996, a joint 3D seismic acquisition program was undertaken
with Texland Petroleum, Inc. of Fort Worth, Texas, at the junction of Sterling,
Tom Green, and Reagan Counties, Texas for the purpose of evaluating deep
(approximately 10,000 feet) potential for oil indicated by production from
nearby properties and by geological evidence. Evaluation is expected to be
complete in the early part of the fourth quarter of 1996, and it is anticipated
that a deep well may be spudded during the first quarter of 1997. The Company
owns 100 percent of the working interest in this project. Geological,
geophysical and the leasehold acquisition costs incurred by the Company in this
project as of September 30, 1996 are approximately $320,000.
The Company's financing was obtained from First Union National Bank of
North Carolina ("First Union") under a $20,000,000 credit facility. Effective
June 1, 1995, this note was amended to provide 25 percent of the borrowing base
as working capital and to lower the interest rate from prime rate plus 1.5
percent to prime rate plus .75 percent. In exchange the bank received 150,000
warrants to purchase common stock at $4.00 per share. Amounts outstanding
under this loan agreement bear interest of nine percent at September 30, 1996
(prime rate plus .75 percent). Interest is payable monthly as it accrues.
Principal on this note was payable in monthly payments of $100,000 with the
final maturity in October, 1997. In May, 1996 First Union reduced the monthly
principal payment to zero. The principal balance outstanding on this loan was
$8,530,000 as of September 30, 1996. Summit's financing was also obtained from
First Union under a separate $500,000 credit facility. Borrowings under this
facility ($352,000 as of September 30, 1996) bear interest at the prime rate
plus 1.5 percent with monthly principal payments of $9,000. These notes are
secured by the majority of the Company's oil and gas properties. Cash flow
from operations will be used to retire this debt.
In the first nine months of 1996, cash flow from operations was
$674,041, as compared to $1,421,850 for the same period of 1995. Exploration
costs and dry hole and abandonment costs incurred in 1996 account for the
majority of this decrease. The net loss was $176,912 in 1996 and $65,271 in
1995. Included in net loss is depletion, depreciation and amortization of
$746,024 and $906,174 for 1996 and 1995, respectively. In 1996, the net loss
includes exploration costs (geological and geophysical costs) of $467,630
related to the three 3D seismic exploration projects in Terry and Hockley
Counties, Texas, and the 3D seismic acquisition program in Sterling, Tom Green
and Reagan Counties, Texas. The 1996 net loss also includes dry hole and
abandonment costs of $412,932 (the costs of two unsuccessful exploratory
wells). Exploration costs and dry hole and abandonment costs must be charged to
expense under the Company's method of accounting. The Company incurred no
exploration costs in 1995 until the fourth quarter.
The Company's investing activities used cash flow of $4,445,413 in
1996 as compared to $1,435,115 in 1995. The increase in 1996 is primarily
related to the purchase of Summit, the acquisition of producing property
interests, the drilling, completion and recompletion of development wells and
the open market purchases of marketable equity securities of a potential
acquisition target oil and gas company. The
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Company is in the process of liquidating its investment in the marketable
equity securities, and has charged to expense previously capitalized costs of
approximately $115,000 incurred in connection with its pursuit of this
acquisition opportunity.
Net cash provided by financing activities was $3,342,562 in 1996 as
compared to cash used of $127,031 in 1995, an increase of $3,469,593, a
result of increased bank borrowings and the collection of a note receivable
from an officer/director.
As of December 31, 1995, the Company had working capital of
approximately $88,000. As of June 30, 1996, the Company had working capital
of approximately $917,924. The increase is attributable to the elimination of
the parent company's current maturities on long-term debt as discussed above.
The Company believes cash flow from operations will be sufficient to fund its
existing operating needs. In addition, the Company has under its present
credit facility the ability to fund its capital needs.
As of June 30, 1996, the Company had total assets of approximately
$18,300,000 with approximately $1,175,000 in current liabilities and long-term
debt of approximately $8,850,000. This compares to December 31, 1995 when the
Company had total assets of approximately $14,123,000 with approximately
$1,951,000 in current liabilities and long-term debt of approximately
$4,525,000. Current assets were approximately 11 and 14 percent of total
assets at June 30, 1996 and December 31, 1995, respectively.
The prices of crude oil have fluctuated significantly in recent years
as well as in recent months. As of January 1, 1996, the posted price was
$18.00 per barrel for West Texas Intermediate crude. As of September 30, 1996,
the posted price was $24.00 per bbl. These fluctuations have a significant
impact on the Company's financial condition and liquidity. However, management
believes it can maintain adequate liquidity for future needs.
Results of Operations - Three Months Ended September 30, 1996 and 1995
Net loss increased from $30,678 for the three months ended September
30, 1995 to $105,141 for the same period in 1996, an increase in loss of
$74,463. Included in the net loss for 1996 was exploration costs of $157,801
for which there was no similar item in 1995. Also included in the net loss for
1996 was dry hole and abandonment costs of $203,983 related to an unsuccessful
San Andres exploratory well. Abandonment costs for the same period in 1995
were $1,031. Other individual categories of income and expense are discussed
below.
Oil and gas sales increased from $1,249,724 in the third quarter of
1995 to $1,765,338 in the same period of 1996. This increase of $515,614 or 41
percent resulted from increased oil and gas prices and oil production offset in
part by decreased gas production. Oil and gas sales included a $5,427 gain in
1995 from gas swap contracts. Oil and gas production quantities were 39,604
bbls and 360,868 mcf in 1995 and 54,198 bbls and 259,511 mcf in 1996, an
increase of 14,594 bbls or 37 percent and a decrease of 101,357 mcf or 28
percent. Oil production increased due to the recompletion of a former gas well
as an oil well at Redfish Bay in the first quarter of 1996, from successful
development wells drilled on the Ned Wilson 133 and T.L.Wallace properties in
the fourth quarter of 1995 and from interests acquired in the Jameson Field
and other producing properties in the second quarter of 1996. Gas production
decreased due to the gas to oil well conversion at Redfish Bay noted above and
production declines at the Copano Bay and Cope properties. Oil production also
declined at Copano Bay. Average gas prices increased from $1.62 per mcf in
1995 to $2.39 per mcf in 1996, while average oil prices increased from $16.63
per bbl in 1995 to $21.11 per bbl in 1996.
Production costs increased from $563,983 in the third quarter of 1995
to $780,814 for the same period of 1996, an increase of $216,831 or 38 percent.
This increase was attributable to increased costs at
Page 13
<PAGE> 14
the Cope waterflood unit and the Redfish Bay properties, and an increased
number of producing development wells drilled in late 1995 and 1996.
General and administrative expenses ("G&A") increased from $222,525
for the third quarter of 1995 to $391,422 for the same period of 1996, an
increase of $168,897 or 76 percent. This increase was due largely to the
write-off in 1996 of approximately $115,000 of previously capitalized costs
attributable to the abandoned oil and gas company acquisition effort described
earlier. The balance of the increase was primarily attributable to increased
labor costs incident to relocation of the Company's corporate office from
Midland, Texas to Houston, Texas.
Depreciation, depletion and amortization ("DD&A") based on production
and other methods decreased from $310,639 in the third quarter of 1995 to
$272,863 in the same period of 1996, a decrease of $37,776 or 12 percent, due
primarily to increased reserve quantities.
Other operating costs and expenses of $29,373 in 1996 represents
the write-off of the net book value (unamortized cost as of September 30, 1996)
of the Company's contract to manage Summit.
Interest expense increased from $158,406 for the third quarter of 1995
to $184,318 for the same period of 1996, an increase of $13,602 or 16 percent
due to increased long-term borrowings offset in part by lower interest rates.
Results of Operations - Nine months Ended September 30, 1996 and 1995
Net loss increased from $65,271 for the nine months ended September
30, 1995 to $176,912 for the same period in 1996, an increase in loss of
$111,641. Included in the net loss for 1996 was exploration costs of $467,630
for which there was no similar item in 1995. Also included in the net loss for
1996 was dry hole and abandonment costs of $412,932 related to the unsuccessful
San Andres and initial Sunburst exploratory wells discussed earlier.
Abandonment costs for the same period in 1995 were $5,497. Other individual
categories of income and expense are discussed below.
Oil and gas sales increased from $3,854,971 in the first nine months
of 1995 to $4,870,664 in the same period of 1996. This increase of $1,015,693
or 26 percent resulted from increased oil and gas prices and oil production
offset in part by decreased gas production. Oil and gas sales included a
$2,074 loss in 1995 and a $25,860 loss in 1996 from gas swap contracts. Oil
and gas production quantities were 124,079 bbls and 968,212 mcf in 1995 and
157,982 bbls and 740,771 mcf in 1996, an increase of 33,903 bbls or 27 percent
and a decrease of 227,440 mcf or 23 percent. Oil and gas production increases
and decreases are attributable to the same properties for the same reasons as
discussed above in the review of operations for the three months ended
September 30, 1996 and 1995. Average gas prices increased from $1.76 per mcf
in 1995 to $2.30 per mcf in 1996, while average oil prices increased from
$17.35 per bbl in 1995 to $20.22 per bbl in 1996.
Production costs increased from $1,867,544 in the first nine months of
1995 to $2,203,103 for the same period of 1996, an increase of $335,559 or 18
percent for the same reasons as discussed above in the review of operations for
the three months ended September 30, 1996 and 1995. Additionally, production
costs associated with producing property acquisitions in mid-year 1995 and
during 1996 contributed to the overall production cost increase.
G&A increased from $805,631 in the first nine months of 1995 to
$1,018,250 in the same period of 1996, an increase of $212,619 or 26 percent.
This increase was primarily attributable to the same reasons as discussed above
in the review of operations for the three months ended September 30, 1996 and
1995.
Page 14
<PAGE> 15
DD&A based on production and other methods decreased from
$906,714 in the first nine months of 1995 to $746,024 in the same period of
1996, a decrease of $160,690 or 18 percent, due primarily to increased reserve
quantities.
Other operating costs and expenses of $29,373 in 1996 represents
the write-off of the net book value (unamortized cost as of September 30, 1996)
of the Company's contract to manage Summit.
Interest expense increased from $451,878 for the first nine months
of 1995 to $496,900 for the same period of 1996, an increase of $45,022 or 10
percent due to increased long-term borrowings offset in part by lower interest
rates.
Page 15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None.
Item 2. Changes in securities
None.
Item 3. Defaults upon senior securities
None.
Item 4. Submission of matters to a vote of security holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and reports on Form 8-K
a. Exhibits:
27 Article 5 Financial Data Schedule for third
quarter 10-QSB (only filed electronically)
b. Reports on Form 8-K - A report on Form 8-K under item
2 acquisition or disposition of assets dated
September 18, 1996 was filed.
Page 16
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
MIDLAND RESOURCES, INC.
(Registrant)
[S]
Date: November 14, 1996 By: /s/ DEAS H. WARLEY III
----------------------------------
Deas H. Warley III, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacity and on the date Indicated:
Date: November 14, 1996 By:/s/ DARRELL M. DILLARD
---------------------------------
Darrell M. Dillard,
Chief Financial Officer
Page 17
<PAGE> 18
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE COMPANY'S FORM 10-Q5B FOR THE QUARTER ENDED SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<CASH> 88,962
<SECURITIES> 309,132
<RECEIVABLES> 982,600
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,093,094
<PP&E> 26,199,432
<DEPRECIATION> 12,111,126
<TOTAL-ASSETS> 18,295,054
<CURRENT-LIABILITIES> 1,172,884
<BONDS> 8,852,787
0
0
<COMMON> 4,401
<OTHER-SE> 7,954,439
<TOTAL-LIABILITY-AND-EQUITY> 18,295,054
<SALES> 4,870,664
<TOTAL-REVENUES> 5,041,620
<CGS> 2,203,103
<TOTAL-COSTS> 4,877,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 496,900
<INCOME-PRETAX> (297,418)
<INCOME-TAX> (101,120)
<INCOME-CONTINUING> (196,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (196,298)
<EPS-PRIMARY> (.045)
<EPS-DILUTED> (.045)
</TABLE>
